Post-distribution claims against ex-spouses who receive life insurance benefits

A common situation is that a decedent owns life insurance that names their former spouse as the beneficiary. There are reasons for someone to designate their ex-spouse as the beneficiary of life insurance proceeds. Those situations usually involve children.

But it is also very common that the deceased simply forgot to remove their ex-spouse as the beneficiary. I often get calls in heartbreaking situations: such as a man who remarries, has children with his current wife, but never changed the designation from his former wife. That can be understandably devastating to the current wife with minor children.

Many states have laws that essentially wipe out beneficiary designations in favor of ex-spouses. The public policy presumption is that such designations should not be effective unless the designation was ratified in the divorce decree, the designation was made after the divorce, or the funds are left to the ex spouse in trust for children. See Texas Family Code § 9.301.

However, many life insurance policies are governed by federal, not state, law. Federal law typical regulates life insurance purchased through a private employer (ERISA), life insurance purchased by federal employees (FEGLI), or by active (SGLI) or retired (VGLI) military. ERISA policies in particular are very common, as many employers offer life insurance as part of an employee benefits package.

Federal law does not override life insurance beneficiary designations to former spouses. To the contrary, federal law typically provides that the benefits must be paid to the designated beneficiary even if the circumstances are clear that the insured simply forgot or neglected to change the designation.

However, I have recently handled several cases where the decedent’s estate has been able to capture all, or a substantial portion of the benefits. How? The US Supreme Court has held that state laws cannot override who the insurance company pays. But that is a policy of ensuring some level of administrative simplicity for the insurance company. But that does not mean that a former spouse can’t waive their ability to KEEP the life insurance proceeds.

The key is the divorce decree. Did the former spouse waive any claim to the life insurance policies and proceeds of the other spouse? Many, many divorce decrees include that as standard language, such as this:

“ Petitioner is divested of all right, title, interest, and claim in and to that property . . . All policies of life insurance (including cash values) insuring Respondent’s life.”

There is case law in Texas holding the decedent’s estate has a claim against the ex-spouse who tries to claim, and retain life insurance benefits they have agreed to waive in the divorce. It is in the nature of a breach of contract claim or a petition to enforce the terms of the divorce decree.

“The most reasonable intention which can be ascribed to parties contemplating separation and desirous of adjusting questions relating to property rights is an intention to make an arrangement relating to the future as well as the present and past, rather than an intention limited to existing conditions with the expectation that, in the future, the parties would periodically come together for the purpose of agreement relating to property thereafter acquired.”

Courts in Texas and other states have found that federal law does not preempt an agreement contained in a divorce decree regarding post-payment relinquishment of benefits. Thus, the decedent’s estate has the possibility of recovering the life insurance benefits.

This is a novel, and evolving, area of the law. It is very important to contact a lawyer with substantial experience in handling life insurance beneficiary disputes.